Why Oil Prices Aren’t Going Down

I kept expecting a pull-back in prices at $90/bbl, then $100, then just watched as prices kept climbing to today’s level of $118. While I won’t be surprised if we do see a short-term correction, in the longer-term I suspect we will be going much higher. Why? Here is part of the reason:

Emerging Market Oil Use Exceeds U.S. as Prices Rise

April 21 (Bloomberg) — Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices.

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris. U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

“The U.S. recession will be a footnote as far as the oil market is concerned,” says Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto, who has correctly forecast higher oil prices since 2000. “Supply isn’t growing and demand is growing robustly in the developing world.”

“The predominant market view is that the emerging economies will overcompensate for any possible demand slump in OECD countries,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. “I couldn’t rule out that oil may go to $150.”

I see no relief in sight. Oil producing countries are growing their consumption at a very rapid clip. With oil prices where they are, money is flowing into the economies of oil exporters. As this happens, people are more prosperous. As people are more prosperous, they use more energy.

While I have sharply disagreed with oil geologist Jeffrey Brown (aka Westexas at The Oil Drum) over his analysis of Saudia Arabia, I think he had an important insight with his Export Land Model (ELM). This model essentially says that prosperous oil-producing countries will cannibalize their own production as the money flows in, leading to falling exports. Of course you can’t extrapolate this down to zero exports, or the money stops flowing in. But rising prices can compensate for falling exports to a large degree.

63 thoughts on “Why Oil Prices Aren’t Going Down”

  1. Forgive my ignorance, but I don’t understand something and am hoping you can explain….

    Hasn’t the “developing world” always used oil (or, at least, tried to)? What’s so special about 2008? What is happening now, that has not happened previously? It’s as though someone just sent a memo to the “developing world” informing them that crude oil exists and can be consumed.

  2. This model essentially says that prosperous oil-producing countries will cannibalize their own production as the money flows in, leading to falling exports.

    And the opposite happens as prices fall. The housing bubble had plenty of positive feedbacks, too, which are now exacerbating price declines.

    The negative feedbacks tend to ramp slowly. PHEVs could slash oil demand, but we’re a couple years from initial mass production and a decade from meaningful impact on oil demand. A crash program could speed that up, but oil could double, triple or more in the interim.

    I think we’ll see rationing at $250-300, if we get there.

  3. Crude price seems very volatile to me, like 1929 crash type of volatile. As far as my limited understanding goes, there isn’t anything substantially different in supply/demand from when oil was $60/bbl, except for propaganda like TOD grinds out daily and the willingness for consumers to pay more without any real slowdown in consumption.

    On the upside, higher oil prices mean more effort into renewable systems and conservation and I hope that they stay above the $100/bbl level. I think that it’s a psychological signpost for the SUV driving consumer that the USA either has to start invading some more oil producing nations or they have to use less.

    Did you see the April 07 issue of Time? “The Clean Energy Myth” is a good start to getting the general public to start realizing there isn’t a silver bullet.

    Disclaimer:
    “I don’t always have a clue, but I always have an opinion. 🙂

  4. It is true that oil-exporting countries, since they get their oil for $5 a barrel or less (one might even posit they get their oil for free, since they had Westerners come in and develop the fields, and then they keep the resulting cash flow)are consuming more oil every year. (Canada is the exception).
    Everyone else, with the sole major exception of China, is using less. India is not using any more oil than in 2005.
    Thailand has a goal of a 5 percent reduction in oil consumption this year. Sweden is going to full energy independence. The US will use 1 percent to 2 percent less this year.
    I keep coming back to it: The BP reports world consumption rose 0.6 percent in 2006 — before later run-ups in price. In 2005, demand rose 1.4 percent, and in 2004, 3.1 percent.
    Surely, no one reasons consumption will keep rising, when oil is in triple digits per barrel?
    Meanwhile, world production is hitting new records every month.
    Precious metals, oil, some other commodities — all hitting all-time highs. I suspect this is a speculative bubble.
    When oil became a speculative commodity, the market changed. Investors tend to follow investors in herds. The run-up in dot.coms in the late 1990s, and the housing boom of the 2000s.
    Now, you have multi-billion hedge and sovereign funds playing the oil futures markets. There are mysterious websites, staffed by anonymous pundits, screaming hysterically at every turn.
    Now oil is the latest boom.
    Bull markets always last longer than they should. When will the oil bull die?
    Who knows? I give it another year.

  5. Oil is just a part of a speculative commodities bubble right now. There are certainly some “real” factors pushing the price of oil up, but none of them can explain this rapid rise in prices, nor can they justify future increases. If anything, the fall in the dollar is the main reason for the rise in oil.

    I just don’t believe this demand story. Of course there is rising demand for oil, but on a world wide scale, this growth is no larger than it ever has been. Furthermore, high prices have a rationing effect which will eventually curtail demand growth.

    Peak-oilers and commodity perma-bulls like to say its different because of peak-oil, or india/china growth, or now because of demand growth in oil-producing states. But the situation is the same as it has always been — prices will ration and the bubble will burst. It might take a bit longer this time because there is no Paul Volker at the Fed, but it will happen.

  6. …kinda torpedoes the notion that “developing countries” are running roughshod. Most of the rate-of-change bars are going to the left, not to the right.
    Sure major declines in Indonesia, Brazil and India(!?) are all surprising. As is the major increase for Thailand.

    But the highest growth rate by far (more than twice the second highest for 2006) was in China(1). With all those Chinese, that makes a dent in overall demand. The rest of the major increases are all in oil producing countries (confirming Jeffrey Brown’s theory), i.e. Iran, Saudi Arabia, Russia, etc. with one interesting exception: the United Kingdom!

    What gives in the land of tea and biscuits?

    (1)In today’s PC world nobody wants to say: “It’s China!” Hence we get the more generic “developing world”. So, in a sense you are right, it’s really just one country in the developing world.

  7. I think the traders, speculators and investors alike, are sensing that supply is genuinely limited. As the prospect that OPEC will (or can) open the taps has become more remote, there is nothing to hold back prices except major recession. Traders will be pushing the price as high as it can go.

  8. Optimist:
    China does subsidize gasoline, a really bad idea. But, China is an interesting country. Look for the behemoth to obtain energy self-sufficiency in the next 10 years. They are also two years away fom producing a battery car with nearly a 200 mile range, which can be recharged in 15 minutes (80 percent recharge).
    see http://www.treehugger.com/files/2008/04/byd-electric-car-e6-crossover-mpv.php

    Sometimes, I get the sense the world is passing the USA by. Other countries have energy programs, aggressive and creative manufacturers.
    It is probably good. Not everything is invented in USA anymore.
    Let’s see: Transportation uses 70 percent of the world’s oil, and battery cars are coming closer with each day.
    Oil shortages? Or will they have to give the stuff away?

  9. Prices apparently aren’t high enough for gasoline and diesel to cause a major shift in consumption habits in the United States. Anecdotally this has also been the case. I don’t know anyone that has actually changed their behavior due to the recent price increases.

  10. “Meanwhile, world production is hitting new records every month.”

    Um, did I miss something? I thought that up until January 2008 production hadn’t crossed levels seen in 2005. And I was under the impression that the record production in 2008 just barely nudged above the previous record.

    And yes, technically that is a new record, but comparing it to previous times that oil production was growing it seems extremely anemic. One might even go so far as to consider it to still be part of an undulating plateau (where have I heard that phrase before … ).

    More interesting would be total exports, but I assume that EIA/IEA doesn’t report that, as it doesn’t end up in pretty graphs.

    In 2004 Saudi Arabia was claiming that they’d increase production 5mbd by 2010. Now it’s 2012. Production is hitting record highs, world inventories are on the low side of average, and demand is supposedly falling. The chocolate ration has been raised from 35g/week to a record 34g/week. And the war still wages against Eurasia.

  11. Yes, new production records every month, according to the IEA.
    86.2 mb/d in July 2006, 86.5 in Nov 07, 87.0 in Dec, 87.2 in Jan, 87.5 in Feb.

  12. The EIA and IEA production graphs have never matched up perfectly, but they have become more discrepant from each other in the last couple of years. Whether you think we are on a plateau or actually have rising production depends on who you choose to believe.

    Perhaps Robert can comment on the reason for such an increasingly dramatic disparity.

  13. Iraq is the big unknown in the peak oil equation. Headlines say the oil law package will be approved soon. That would open the door for an oil boom in Iraq.

  14. Benny (or anyone else who knows the answer),

    Is there a specific historical date that one can cite as the time when oil “became a speculative commodity”?

  15. Someone asked me a question?
    To my knowledge, the NYMEX oil trading has been around for a couple decades. What is new is the volume. Much, much higher than before.
    My short take is that 10 years ago, the dog wagged the tail.
    Now…..

  16. They are also two years away fom producing a battery car with nearly a 200 mile range, which can be recharged in 15 minutes (80 percent recharge).
    You believe that? As I mentioned before, some observers are less enthusiastic about the coming electrification of transport. Could GM’s moonshot land with a THUD? Stay tuned.

    Sometimes, I get the sense the world is passing the USA by. Other countries have energy programs, aggressive and creative manufacturers.
    Now you’re touching a nerve. It’s not an absolute truth: I don’t see China’s wealth as sustainable – not the way they need to keep repressing their own people.

    Nonetheless, things are not as great in the land of the free, as it could be. Reasons include:
    1. A religious faith in absolute capitalism, growing ever stronger since the fall of communism. No absolute is good.
    2. Capitalism proceeding to corrupt everything else, including politics (Have the lobbyists write that law for us!) and journalism (Never mind the election! Get me some footage of the car chase and Britney Spears!).
    3. A messianic view of CEOs, leading to absurd payments for these saviours. When they don’t deliver, another 10,000 jobs are lost. But Mr. Big Shot get to keeps his payments, of course.
    4. A culture where vested interests are powerful enough to resist change (read: improvement) because that may be inconvenient.
    5. A leadership crisis personified by Mr. Bush, but much bigger than any individual. I see it every day at work. For example, if Mr. Bush wants to invade Iraq, the considerable resources at his disposal are used to make his case. Where a few years ago people would have stood up, and told him that this Iraq business makes no sense. Today all fall in line and do as Mr. Personality tells them to do. A bunch of highly respected and intelligent people (need I mention Colin Powell?) are no longer allowed to question decisions, they just have to use their talents to justify a random decisions. This a a huge problem. You can have all the talents in the world working for you – but if you abuse them like this, the result is going to be a HUGE screw-up (I almost mentioned corn ethanol).

  17. @Optimist: that TTAC piece you linked suggests (fairly convincingly) that GM won’t be the ones to produce a market-viable electric car. But that doesn’t mean that nobody will. If anything, that only bolsters Benny’s point, that innovations like that are now more likely to come from outside the US.

    To me, one of the biggest reasons for pessimism about the US’s place in the world is the huge numbers of engineers graduating annually in India and China vs. the US. We can only rest on our laurels for so long…

  18. Mike C,
    Well, I get a different conclusion from the TTAC piece: Plug-ins clearly are not about the economics, because even the plug-in Prius (@$30k) has a payback of between 24 and 35 years versus the regular $22k Prius in the above three scenarios. So, Toyota cannot make PHEV affordable. Considering Toyota’s (co-)leadership in this field, who else would?

    Or how about: Scenario two and three point out the Volt’s two biggest weaknesses: its expensive and heavy battery pack becomes increasingly less cost-effective when its maximum range is not fully utilized (Scenario 2). And its serial hybrid drive is no more efficient (if anything, somewhat less so) at continuous highway speed than Toyota’s HSD (Scenario 3). The Volt’s efficiency losses of generation, conversion, battery storage, re-conversion to AC, and electric drive-motor losses equal or exceed the minimal efficiency loss of the Prius’ mechanical transmission. That question: What is a good battery size? will remain, for any PHEV. And that’s assuming they can make Li-ion work.

    Electric transport is not the slam-dunk some believe it to be (including the author of this blog). Could someone make it work? Sure. Most likely that is going to involve a big compromise on performance, range, etc. I won’t count the ICE as out, just yet.

    And bear in mind that electricity rates will eventually be affected by high oil prices: as more users switch from oil to electricity (including PHEV) demand for electric power increases, until rates go up in response.

    To me, one of the biggest reasons for pessimism about the US’s place in the world is the huge numbers of engineers graduating annually in India and China vs. the US.
    In the past, America made up the difference by importing the best and brightest from around the world. But things are changing. America’s position as a world leader is being contested in many different ways, including W’s brain-dead policies.

    We’ll see. Perhaps a few years of living with shortages of engineers will teach America to appreciate these skills…

  19. To me, one of the biggest reasons for pessimism about the US’s place in the world is the huge numbers of engineers graduating annually in India and China vs. the US.
    In the past, America made up the difference by importing the best and brightest from around the world. But things are changing. America’s position as a world leader is being contested in many different ways, including W’s brain-dead policies.

    Apples and oranges. India and China count as “engineers” graduates of technical programs and others who are not as qualified as US graduates. A CAD/CAM designer might be called an “engineer”, but electronically reprodrucing the drawings is not the same as doing the calculations required. Many of the engineering schools in India and China would not be acredited in the US. I’m not saying that there are not good engineers from China and India, just that the nubmer is inflated.

    There is also a lot of “make work” engineering in India and China. I’ve seen whole buildings full of people producing little or nothing of engineering value, but generating lots of reports and drawings. American engineers are very good at making judgement and engineering value decisions.

    Our contractors farm out a lot of work to India. We will send marked up drawings at close of business and by morning the engineers in India have cleaned them up. They do it mostly because it is cheap. The markup on an Indian engineer is a lot higher than for a US engineer.

  20. Optimist:
    I did not find the article very compelling (on PHEVs). These are first-gen cars. Being compared to a pretty good hybrid.
    People in Los Angeles are spending $100 a week now on gasoline. That’s 5k a year. I suspect they will start to buy much more-efficient cars. If gasoline goes to $5 a gallonn, they will buy PHEVs.
    I stil say PHEVs should be introduced as upscale cars. People in L.A. drop $75k on a Mercedes w/o blinking an eye. I don’t know why GM is going down the road is serving up the Volt as a economy vehicle. Okay, I do know why; they are GM and they are stupid.
    They shoud sell a Cadillac PHEV — the buyer is paying for the luxury of not stopping in a smelly gasoline station, and wasting time.
    I stand by my main point: If oil stays above $100 a barrel, the world will migrate to PHEVs. China and India will never have huge fleets which drink diesel or gasoline. There is no horror story in the future.
    If China, India and the West mandte high MPG cars, then OPEC will have trouble giving away their crude.

  21. Optimist: I’d hate to know what you call a pessimist…..
    Benny, Optimist does not mean stupid or ignorant. I’m still interested in what’s for real. PHEV are interesting, but may not be workable, just yet.

    And being skeptical about PHEV, is not the same as being pessimistic in general.

    These are first-gen cars. Being compared to a pretty good hybrid.
    Let’s remember the specs for those first-gen cars were pretty much pulled out of GM’s collective butt. We’ll only know the real specs when (if?) the Volt hit the streets. Whenever that may be.

    So far, things are changing pretty rapidly for the Volt: It won’t look like that cool model y’all ‘ve been drooling over – that model did pretty badly in wind tunnel tests.

    I stand by my main point: If oil stays above $100 a barrel, the world will migrate to PHEVs.
    Speculation! You’re assuming PHEV makes the most economic sense. That’s a pretty big assumption.

    Let me re-phrase that for you: If oil stays above $100 a barrel, the world will find ways to conserve, which may include PHEVs.

  22. There is also a lot of “make work” engineering in India and China. I’ve seen whole buildings full of people producing little or nothing of engineering value, but generating lots of reports and drawings.

    Sounds like every major (American) aerospace contractor, at least in the last two decades.

  23. The article about the Volt is pretty badly done.

    First, they assume a price of $48k, which is wrong. Lutz said that $48K would be a reasonable list price, not that they were going to charge that much. He also said that their cost was likely to be about $40k, and that they plan to subsidize it’s price for several years – that adds up to a likely price of about $35K.

    2nd, they assume a range of 32 miles, when it’s more likely to be about 50 miles in the normal commuting application (GM is specifying a 40 mile range after 10 years of use).

    3rd, they use a price of $22K for the Prius, when actual sales prices are roughly $24K.

    4th, they assume an average retail price for electricity, when they should be using much lower night time pricing (this is generally available now, even though utilities don’t advertise it).

    5th, they arbitrarily assume a $8K premium for a plug-in Prius, which is way too high for a slightly larger battery (only 1.3KWH larger).

    Such a bad article…

  24. First, they assume a price of $48k, which is wrong. Lutz said that $48K would be a reasonable list price, not that they were going to charge that much. He also said that their cost was likely to be about $40k, and that they plan to subsidize it’s price for several years – that adds up to a likely price of about $35K.
    Let’s see, $48k is a reasonable price, but GM will sell for $35k? Since when do they work for (environmental) charity?

    2nd, they assume a range of 32 miles, when it’s more likely to be about 50 miles in the normal commuting application (GM is specifying a 40 mile range after 10 years of use).
    That’s all speculation at this point. The point of the article was this:
    1. If your commute is less than the battery range, you are wasting energy lugging unnecessary battery weight around.
    2. If your commute is more than the battery range, you are going to use the (inefficient, relatively speaking) gas engine to lug the heavy battery around.

    3rd, they use a price of $22K for the Prius, when actual sales prices are roughly $24K.
    According to Kelley Blue Book, “What consumers are really paying for this vehicle (2008 Toyota Prius 4-door Standard Hatchback; in expensive SoCal):” $21,416.00.

    4th, they assume an average retail price for electricity, when they should be using much lower night time pricing (this is generally available now, even though utilities don’t advertise it).
    Let me get this straight: the utilities are not advertising it, and as a result many consumers don’t know about it. Yet, you want to cherry-pick this number for the analysis?

    5th, they arbitrarily assume a $8K premium for a plug-in Prius, which is way too high for a slightly larger battery (only 1.3KWH larger).
    And yet GM is talking about leasing the battery to keep costs down. Who knows what the battery would cost (RR would love to jump on low ball projections), but based on the prices listed at CalCars, $8k seems like a realistic estimate.

    Such a bad comment…

  25. Let’s see, $48k is a reasonable price, but GM will sell for $35k? Since when do they work for (environmental) charity?

    There is no official Volt price. GM exec comments range from <$30k to 40k. Lutz says $48k was a misquote; even if not he was talking about year one. No car is profitable in year one. Prius was unprofitable through year eight. Toyota does not work for (environmental) charity. They took a risk to gain strategic advantage, and succeeded. GM is taking the same risk, and may or may not succeed. <<1. If your commute is less than the battery range, you are wasting energy lugging unnecessary battery weight around.>>

    The author engaged in debate on a GM-Volt.com forum. He is educated and makes some good points. This is not one. Do you waste energy lugging around twenty gallons of gas when your daily commute only needs one. Or lugging around seats for five when you’re alone? Yes, but it’s de minimus.

    Volt pack is 170 kg. A 20 mile pack would not weigh 85 kg because you can’t pull the same power from a half-sized pack. “Excess” weight for the extra 20 miles range is thus 60-70 kg. About the same as the aforementioned 20 gallons of gas. It’s silly.

    He’d be better off arguing cost. Someone who commutes 15 miles/day is overpaying. Then again, people who drive 5000 miles/year aren’t really the target market.

    The “highway efficiency” angle is as bad as the extra weight argument. Prius drivetrain is estimated at 85% efficient under highway conditions (Prius power transfer is NOT all mechanical as he implies). Volt’s all-electric power train should come in around 80-85%, and Volt’s serial approach allows for more efficient ICE operation. Tire selection will have more effect on highway MPG than serial vs. parallel drivetrain issues.

    but based on the prices listed at CalCars, $8k seems like a realistic estimate.

    Aftermarket retrofit prices are higher OEM. Prius uses a 1.3 kWh NIMH “power” battery. OEM price is about $1200/kWh, or $1500 total. Delete this expensive power battery and insert a 10 kWh “energy battery”, which OEMs at $500-600/kWh (note: battery vendor price targets are more like $300/kWh in mass production, but that is unproven). OEM cost premium is thus $4000, not $8000.

    Assume 10k EV miles/year, 5 cents/kWh off-peak rates and 4.15/gallon gas to get annual savings of $800 and a five year payoff. Since the car lasts ten years, it’s a clear economic win. Different assumptions produce different results and ridiculous assumptions, like some of the author’s, produce ridiculous results.

    Of course GM hopes early adopters will buy the Volt even if it doesn’t make economic sense, just as buyers did with the 1997-2003 Prius (not to mention buyers who paid well above list price for 2004+ Prius). GM further hopes for a halo effect to lift their entire brand. Time will tell.

  26. It would be interesting to see Mexico’s Export Land Model. Seems their politicians are content with the status quo, which will lead to a quick dry up of oil exports. This will certainly put a big hurt on the US, thanks to our own politicians.

  27. In the spirit of leaving no dead horse unbeaten, a few more words on PHEV cost. SAE (and other) papers have gone through hybrid and PHEV costs component by component. They put PHEV-40 cost premium at $5-10k, depending on design and assumptions. GM’s E-Flex design is elegant, but expensive. Toyota’s HSD approach is cheaper, and the approach I believe BYD is using is cheaper still. Note that BYD claims a $6k premium even for their first-gen PHEV.

    The 5-10k is volume price, first gen will cost more. The first Prius was very expensive. One Detroit exec said the cheapest way to get a 1.6 kWh NIMH power battery was to buy a Prius, pull the battery and scrap the car. An exaggeration, but not as much as you’d think. The 2004 Prius was bigger and faster, with higher MPG, but was dramatically cheaper to build. Toyota claims the cost premium for their 3rd gen Prius (2009/10) will be HALF the current level. This is not hard to believe, even after 10 years of engineering the current Prius still has obvious redundancies like a 12v battery.

    But let’s say the Volt did cost $40k. And let’s say we fully subsidized them — every new car buyer in the USA gets a free Volt! How much would that ridiculous plan cost? 16 million cars at $40k per comes to $640 billion per year. We now spend over $700 billion per year on oil imports and mideast military adventures.

    Words alone cannot properly convey how stupid we are for not instituting a massive program today. The economics are overwhelming, the geopolitical advantages incalculable and if we use the cheapest form of electricity (wind), we get dramatically lower CO2 emissions as a free side benefit.

  28. doggydog–

    I like you rpost. I, too, keep coming back to the point you made: It is cheaper to implement energy independence programs in the US, than to keep importing oil, and spending $100 b. a year in Iraq.
    Scientific American estimated the cost of going to solar power plants at $400 b. We are in for $1 trillion already in Iraq, and little to show for it……
    Optimist: Point taken. I don’t really care what kind of cars we go to in the USA, as long the fleet average is above 50 mppg….

  29. Lutz says $48k was a misquote.
    Funny you mention that. He does have that problem. Or maybe it’s a misalignment between the propulsion of mouth and brain.

    Prius was unprofitable through year eight.
    That’s GM-tinted speculation.

    They took a risk to gain strategic advantage, and succeeded. GM is taking the same risk, and may or may not succeed.
    Ah, but here there is a world of difference. Toyota didn’t promise to save the planet with the Prius I. They put it out there, and then slowly worked to improve it. GM has hyped the Volt to the point where it is almost impossible not to dissappoint.

    “Excess” weight for the extra 20 miles range is thus 60-70 kg. About the same as the aforementioned 20 gallons of gas. It’s silly.
    20 gal in a big SUV tank, not a midsize sedan. That would be more like 12 gal. And note the gas tank is not full on average. If you drive, like I do (your weight may vary), the average would be close to 6 gal. That’s just over 20 kg, i.e. 150 kg less than the Volt battery pack. Not silly, more like worth mentioning.

    OEM cost premium is thus $4000, not $8000.
    That’s speculation. But we’ll know soon enough.

    Assume 10k EV miles/year, 5 cents/kWh off-peak rates and 4.15/gallon gas to get annual savings of $800 and a five year payoff.
    You are not trying to load the dice with those assumptions, are you? Talk about ridiculous assumptions and ridiculous results.

    Of course GM hopes early adopters will buy the Volt even if it doesn’t make economic sense…
    They’re hoping for 100k in sales, from year 1. That’s crazy.

    16 million cars at $40k per comes to $640 billion per year. We now spend over $700 billion per year on oil imports and mideast military adventures.
    Interesting perspective. Can’t help you there. If it was up to me, I would have told the clown to stay out of Iraq, at least until Afganistan resembled some state of order. But hey, back in 2002 that was considered irresponsible.

  30. History has a way of repeating itself. The high oil prices from the Arab oil embargo brought about the rapid development of both the North Sea and Alaska oil fields. High prices in 2008 may lead to a boom in production offshore Brazil and in the oil sands of Alberta.
    Brazil Oil Finds May End Reliance on Middle East Oil

    I read the Volt vs. Prius article. I thought it was funny that the author did an economic analysis to find out the payout on the Volt wasn’t very good. But he didn’t do the same for the Prius, comparing it to say the 33 MPG Chevy Malibu.

  31. But he didn’t do the same for the Prius, comparing it to say the 33 MPG Chevy Malibu.
    Sure. The Prius is (finally?) selling in significant numbers, outselling some conventional cars, though.

    BTW, according to Kelley Blue Book, the 2008 Chevrolet Malibu 4-door LS Sedan retails for $19,595.00, or $1,821.00 cheaper than a Prius @ 46 mpg according to http://www.fueleconomy.gov. A 4 year paybeck, then, assuming you drive 15,000 miles/year. But it appears the non-hybrid Malibu (that’s the one you were referring to, right?)only gets 25 mpg, which would reduce the payback to just a hair under 2 years. Not bad, eh? Must be why Toyota is selling so many of them.

    Data for the “What consumers are really paying for this vehicle” Malibu Hybrid is limited, but it is right around the price of the Prius with significantly worse mileage. Must be why GM sell so few of those…

    Will the Volt sell like a Prius or a Malibu Hybrid? (Hint: Who’s selling what, again?) Or more precisely, how will GM have to price the Volt to achieve Prius type sales numbers? Will the “moonshot” bleed GM dry? This is getting ugly fast, and the Volt is not even in the showroom, yet.

  32. Prius was unprofitable through year eight.
    That’s GM-tinted speculation

    You’ve really got a thing about GM, don’t you? It’s well known the early Prius design was not profitable at $19,995, and Toyota never claimed otherwise. They DID claim the 2004 model was profitable. Normal R&D amortization would put profitability around 2005, eight years after initial launch in Japan.

    OEM cost premium is thus $4000, not $8000.
    That’s speculation.

    It’s all speculation. My speculation is informed by OEM battery prices and SAE papers. The TTAC guy just pulled $8000 out of his ass (nice trick:-).

    But we’ll know soon enough.

    I doubt it. Toyota does not plan to sell a PHEV Prius to the public. Limited production fleet test vehicle rarely have published list prices.

    They’re hoping for 100k in sales, from year 1.

    No, they’re not. Stated year one volume is 10k. The GM-Volt.com waiting list is almost 20k now, though that includes people who won’t actually buy it (like me, who thought it would be a five seater which I could almost, kind of justify).

  33. Since when do consumers consider “payback time” when buying a car? I can think of a lot of other reasons for buying a Volt that make more sense. Like not being held hostage by a pump…

  34. It’s well known the early Prius design was not profitable at $19,995, and Toyota never claimed otherwise.
    Well known? By whom? Speculation, as I said…

    My speculation is informed by OEM battery prices and SAE papers. The TTAC guy just pulled $8000 out of his ass (nice trick:-).
    Your ass versus his then. More like an UGLY trick…

    Toyota does not plan to sell a PHEV Prius to the public.
    Or rather, they’re not promising to save the planet with it. They may well beat GM at the PHEV thing. But we’ll see.

    The GM-Volt.com waiting list is almost 20k now, though that includes people who won’t actually buy it (like me, who thought it would be a five seater which I could almost, kind of justify).
    Sounds like Tesla’s waiting list. Let’s hope GM does better than that.

    Power to GM if they pull this off. But it would be nice if they stopped yapping about it, and got some test models out there, you know, on any kind of schedule. It began in March of last year, when Lutz promised a running Volt prototype by the end of 2007. A test mule with the Volt drivetrain crammed into an existing model would have provided reasons to be cheerful, part one. But it wasn’t to be. In November, Bob revised his estimate: “Let’s wait for the Easter Bunny.” Did he mean Easter 2009?

  35. Optimist – I know someone who has a Malibu and gets 30+ MPG. I haven’t seen Prius selling much below sticker, but with incentives you can get a nicely equipped Malibu for $17,500. So the payout on a Prius is maybe a bit longer.

    If you compare the Prius to the Chevy Cobalt at 35 MPG and list price of $15,000 it looks even worse.

  36. I didn’t know anything about the Chevy Cobalt until you mentioned it, so I looked it up. I was set on a Prius, but I need to make sure I have considered all my options. I need to start a post entitled “Which Car Should I Buy?”

    RR

  37. Well known? By whom?

    The carmakers all did Prius teardowns circa 2000. A big national lab (ORNL, I think) also did teardowns and published reams of data. Articles in trade rags took this data and calculated component costs and so forth. The Gen1 Prius simply wasn’t designed for profitability. The battery was very expensive, the power electronics used off-the-shelf components, assembly was by hand on a dedicated line which only turned out a few cars per hour, etc., etc. NWH11 was mildly cost-reduced but NHW20 was the quantum leap. The battery was 30% smaller and dramatically cheaper, power electronics were custom-designed for volume production, the cars were built on their normal high-volume assembly lines and so on.

    This isn’t an indictment against Toyota. It doesn’t make sense to cost-reduce these low volume Gen1 designs. It can cost half a billion and 12 monhs to wring the last $10k out of a design. Toyota made less than 20k units of the NHW10 version. It’s cheaper to just eat the $10k per unit.

    Volt Gen1 is the same way. GM is simultaneously developing a cost-reduced Gen2 (or Gen1.5) design for volume production. Meanwhile the Gen1 program is focused on time-to-market. If GM eats a $10k loss on the first year’s 10,000 units and even a similar number in the second half-year they’re still way ahead of the game.

    As for test mules, GM has been running them for months. But these had NIMH batteries and were mostly used to test the motors and control software and calibrate stuff like regenerative braking. They only recently started running mules with lithium batteries.

    I don’t consider GM’s Volt hype, or Toyota’s lack of PHEV hype, to be relevant. You either build cars or you don’t. GM is gearing up to build cars. Toyota had a misstep with lithium-cobalt batteries, but is still well positioned to make a move. BYD is a potential upstart and even long shots like Fisker might help get the ball rolling. I’m rooting for all of them. We desperately need these cars.

    As for Lutz, he’s entertaining but you can’t get much useful info out of mainstream press articles built around his sound bytes. He’s all over the map and the writers are pretty clueless. Read/watch the lengthy interviews with product engineers and program managers if you want to get a feel for what’s actually happening. That picture is pretty stable, and quite encouraging.

  38. If you compare the Prius to the Chevy Cobalt at 35 MPG and list price of $15,000 it looks even worse.
    That’s a bit of an apples and oranges comparison. The Cobalt is a wee bit smaller than the Prius.

    I didn’t know anything about the Chevy Cobalt until you mentioned it, so I looked it up. I was set on a Prius, but I need to make sure I have considered all my options.
    Of course, a handy rule of thumb would be: as small as is practical. The Cobalt may well be it. Or the Toyota Yaris. Or the Honda Fit.

    I need to start a post entitled “Which Car Should I Buy?”
    That’s kinda what this post was about, isn’t it? Unfortunately, VW killed the diesel hybrid in the mean time. Must be a conspiracy, then?

  39. I’m rooting for all of them. We desperately need these cars.
    Power to who ever makes this work. I’m not so sure we need these cars, as it appears to me electrification of transportation is neither a slam-dunk solution, nor necessarily the environmental knight-on-a-white-horse many believe it to be.

    We’ll see. I’m getting some popcorn. Interesting times ahead!

  40. Volt vs. Prius vs. Cobalt are hard to compare on an apples-to-apples basis. I tried to compare Prius to a hypothetical Toyota mid-size partway between Corolla and Camry, and even that was very inexact. Most comparos I read are garbage, slanted heavily to give the author’s desired result. The TTAC article is an excellent example.

    The best comparo I’ve done is Camry Hybrid vs. Camry. I start with a price part way between the 4 cyl and V6, because Camry Hybrid power output is between those two. Most of the other adjustments are standard features which you can pick off the option lists. I had to make up a cost penalty for Camry Hybrid’s smaller trunk and lack of folding rear seats. FWIW, I came up with a $1500-2000 premium for the Hybrid and a 4-5 year payback based on 12k miles/year and $3.00 gas.

  41. I may be able to put it off until summer. If so, that sounds pretty promising.

  42. King will like this option: the XFE (eXtra Fuel Efficiency) Cobalt, as of May 17, all Cobalts with the five-speed manual tranny get 36 mpg on the highway. You need to g’t ‘er done before fall/Thanksgiving, though: come the ’09 model year, the Cobalt sedan will no longer be available with a manual transmission.

  43. Chevy Cobalt XFE gets 36mpg highway and 25mpg city. What’s the combined EPA rating, 29mpg? I think I’d rather go for the cheaper Honda Fit at 31 mpg combined. I also prefer the cargo capacity of a hatchback.

  44. RR hasn’t commented on the last couple TWIPs, but I was wondering if anyone could answer a question I had.

    If finished gasoline reserves are so far above normal, why is the price still increasing (I’m talkign about the weeks/months timescale here)? I recall hearing somewhere that an increase in the price of a commodity causes stocks to icrease, but I can’t intuitively see why that would be.

  45. Can you wait until summer? Volkswagen announced that they will be introducing the Jetta BlueTDI in the US this summer in all 50 states. They say it can get up to 60 mpg on the highway.

    Clee, something we can agree on! I own a 2006 Jetta TDI but with a dirtier Euro-spec engine.

  46. carbonsink writes:
    Clee, something we can agree on! I own a 2006 Jetta TDI but with a dirtier Euro-spec engine.

    Actually, I just threw in the idea as something to think about. I don’t actually recommend the VW Jetta Blue TDI because it’s not out yet, and is therefore still vaporware. Last year they said it would be available this spring. Now they are saying it be available in the summer, which could mean September. The schedule could slip yet again. While the press release says it can get as much at 60mpg, it does not say if it will typically get that, or what the EPA highway rating would be. While rumors are it will be priced around $20K, we won’t really know until you can actually order one. If in the end it costs around the same as a Prius and if in the end it gets a combined EPA rating the same as a Prius, I’d probably want to buy the Prius (or the Honda Fit). So I’m not really agreeing to anything.

  47. So I’m not really agreeing to anything.

    I’m glad we’re not being too nice to each other then 🙂

    Ok, I’ll tell you my real world experience with the Jetta. AFAIK its essentially the same car as the US-spec Blue TDI. Same body, chassis, and the engine produces exactly the same power and torque. My car was built in Mexico (where I imagine Jettas for the US market will be built as well) and I’m in Australia.

    This is undoubtedly the best car I’ve ever owned. It criuses effortlessly at barely above idle, has amazing hill-climbing ability and rolling acceleration, and excellent fuel efficiency. If you need a large boot (trunk) the Jetta will not disappoint.

    The Jetta is also safer than most mid-sized cars, with standard front, side and curtain airbags, stability control, traction control, emergency brake assist and excellent Euro and U.S. crash test results.

    On Thursday I drove 650km (~400 miles) fully-loaded, four people and all their luggage in mixed driving conditions (Australian highways are not like US highways). The car averaged 5.1L/100km (46mpg US).

  48. You got 46 mpg US in the Jetta TDI? The Prius has a combined EPA rating of 46 mpg, and sadly, being an average driver, that’s likely what I’d get. So same mpg, but diesel costs about $1 more per gallon right now than gasoline, so I’d have a larger annual fuel bill with the Jetta. You’re not succeeding in selling me on the Jetta.

    Actually I get the rated EPA miles on my current cars using the pre-2008 EPA standards, so I might actually get better mileage than the 2008 ratings, but that’s unproven, so I’m not assuming that. Better drivers than I am have driven my car, fully loaded with 4 people on US highways and gotten 2 mpg better than the pre-2008 EPA highway rating. For all I know, you could be such a good driver.

  49. You’re not succeeding in selling me on the Jetta.

    Each to their own. Its a car worth considering if you’re looking for a fuel-efficient, practical vehicle. I have a family of four and we travel long distances frequently which rules out small cars like the Honda Fit. The Prius would probably be a better option for me if I did a lot of city driving in stop-start traffic, but I don’t.

    I will say this, hybrids are still struggling to get above 3% market share in the US, whereas diesels represent more than 53% of new car sales in Europe. Even in countries where diesel is more expensive than petrol (gasoline) diesel-engined cars are rapidly gaining market share.

    Clearly diesels make economic sense (in Europe at least). If hybrids really made sense why are they still struggling to gain market share?

  50. Diesels get tax incentives in Europe above and beyond fuel price. And does diesel really cost more than gasoline anywhere in Europe? On a volumetric basis perhaps, but mass/BTU basis? That’s what counts in the real world.

    VW Golf TDi vs. Twincharger shows diesel has an 8% apples-to-apples efficiency advantage over gasoline. This advantage is worth pursuing for part of your fleet, but Europe has clearly overshot. It’s silly to favor diesel to such extent that your refineries must ship excess gasoline overseas. The US has gone too far the other direction, virtually banning diesels via air-quality regulation. It’d be smarter for both to normalize their diesel/gasoline ratio.

    US hybrid market share continues to climb even after tax incentives were phased out for the most popular models. Toyota claims their next-gen HSD will cut the “hybrid premium” in half. We’re still in the early innings.

  51. Well, I’m disappointed. I thought the new Volkswagen Jetta TDI would get about the same mpg as the Prius,
    http://www.autoblog.com/2008/05/21/official-epa-numbers-posted-for-the-09-jetta-tdi-30-41mpg/
    “VW has been indicating that the Jetta TDI is capable of up to 60mpg on the highway. …According to the official listing at FuelEconomy.gov, the 6-speed manual 2009 VW Jetta TDI managed 30mpg on the city cycle and 41mpg on the highway cycle, making its combined number 34mpg.”

    34 mpg, that’s all?

  52. http://www.germancarblog.com/2008/06/vw-jetta-tdi-vw-jetta-sportwagen-tdi-us.html
    Volkswagen of America, Inc. today announced pricing for their eagerly anticipated Jetta TDI sedan and SportWagen starting at $21,990 and $23,590, respectively …
    While the Environmental Protection Agency estimates the Jetta TDI at an economical 29 mpg City and 40 mpg Highway, Volkswagen went a step further to show the true fuel economy of the Jetta TDI. Leading third-party certifier, AMCI, has tested the Jetta TDI and found it performed 24 percent better in real world conditions, achieving 38 mpg in the City and 44 mpg on the Highway.

    So the TDI will cost the same as the 2008 Prius, and even using the AMCI numbers of 38/44 mpg city and highway, the TDI gets worse fuel economy than the Prius’ 48/45. Add in that diesel fuel costs more per gallon than gasoline, I’d rather buy the Prius.

  53. It’s my wife’s birthday today as well. My son also told me that a friend of his also has today as his birthday. In 2005, I said I didn’t think oil would ever drop below $50 again. I am very close to being wrong.RR

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